Trending Decisions Cases We Are Following

Trending Decisions Cases we are following

By Natasha MacParland and Robert Nicholls

The following is a table of current cases of interest to the Canadian insolvency community as prepared by Natasha MacParland and Robert Nicholls of Davies Ward Phillips & Vineberg LLP

INSOLVENCY CASES UNDER APPEAL CASE SUMMARY OF SIGNIFICANT ISSUES STATUS OF APPEAL

Canada v. Canada Do “super priority” charges granted in a Compa- The Court of Appeal of Alberta, on August 29, 2019, North Group Inc. nies’ Creditors Arrangement Act initial order (in- confirmed the power of the Court to grant charges (Alberta) cluding debtor in possession and administrative pursuant to the Companies’ Creditors Arrangement Act charges) have priority over a statutory deemed in favour of interim lenders, restructuring professionals trust for unremitted source deductions? and directors with such charges having priority over the company’s assets ahead of the deemed trust claims of the Crown arising from the Income Tax Act, the Canada Pen- sion Plan and the Employment Insurance Act. Leave to appeal to the Supreme Court of Canada was granted on March 26, 2020. The hearing was held on December 1, 2020. The decision was reserved and has yet to be released. The Insolvency Institute of Canada and the Canadian Association of Insolvency and Restructuring Profession- als are interveners in this matter.

Callidus Capital Can a debtor whose sole remaining asset is a The Supreme Court of Canada heard the appeal on Corporation v. 9354- litigation claim seek court approval to obtain January 23, 2020. On the same day, in a unanimous 9186 Quebec Inc. litigation financing to pursue the litigation, or decision, the Supreme Court of Canada allowed the [Bluberi Gaming does such course of action itself constitute a appeal, overturning the decision of the Court of Ap- Technologies Inc.] plan which should be submitted to and subject peal of Quebec. (Quebec) to the vote of creditors? Written reasons were released on May 8, 2020. The Can a court bar a creditor from voting on a plan Supreme Court of Canada held that pursuant to sec- of arrangement? tion 11 of the CCAA, the supervising judge in CCAA proceedings has broad discretionary authority that will only be interfered with if the supervising judge erred in principle or exercised their discretion unreasonably. As a result of the broad discretion granted to the supervising judge, he or she has jurisdiction to: • bar a creditor from voting on a plan of arrangement if that creditor is acting for an improper purpose (in this case, a secured creditor attempting to strategically value its security to acquire control over the outcome of the vote on the plan of arrangement was held to be an improper purpose); and

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CASE SUMMARY OF SIGNIFICANT ISSUES STATUS OF APPEAL

(continued from previous • to approve third party litigation funding as page) interim financing in insolvency proceedings. Such litigation financings do not, by definition, constitute a plan of arrangement (the Supreme Court of Canada did not find that the specific financing agreement in this case constituted a plan). As of December 22, 2020, while this case has been cited on numerous occasions in relation to the discretion to be afforded to supervising judges, the above-noted creditor voting principle has received favourable judicial commentary on one occasion and the other principle has yet to receive judicial commentary. The Insolvency Institute of Canada and the Cana- dian Association of Insolvency and Restructuring Professionals were interveners in this matter.

Third Eye Capital Cor- Whether gross overriding royalties (“GORs”) at- The Court of Queen’s Bench of Alberta held that poration v B.E.S.T. Ac- taching to mining claims are interests in land or the GORs held by B.E.S.T. were security interests in tive 365 Fund, B.E.S.T. security interests? land and that knowledge of another secured party’s Total Return Fund Inc. Whether knowledge is irrelevant to a determina- pre-existing security interest is irrelevant to a deter- and Tier One Capital tion of priority under section 95 of the Mines and mination of priority under the Mines and Minerals Limited Partnership and Minerals Act? Act. ACCEL Energy Canada Leave to appeal the trial level decision was heard on Limited and ACCEL April 16, 2020 and the Court of Appeal of Alberta Canada Holdings released its decision on leave on April 27, 2020. Limited In its decision, the Court of Appeal of Alberta (i) (Alberta) denied leave to appeal with respect to the first issue, confirming that GORs attaching to mining claims are interests in land; and (ii) granted leave to appeal with respect to the second issue. Notice of Appeal was filed on May 1, 2020. The date for the appeal of the substantive issues has not been set.

Canada v. Toronto- Is a secured creditor required to reimburse payments The Federal Court of Appeal dismissed the appeal Dominion Bank made to it by a borrower who failed to remit GST on April 29, 2020, confirming that a secured credi- (Federal/Quebec) source deductions, or do the deemed trust provisions tor is required to reimburse payments made to it require a “triggering event”; i.e. bankruptcy of the by a borrower who failed to remit sales tax source debtor, realization of security or requirement to pay? deductions, under the sales tax deemed trust provisions. A “triggering event” is not required. Leave to Appeal to the Supreme Court of Canada was filed on June 29, 2020. Responding materials were filed on August 28, 2020. The Canadian Bankers’ Association was an intervener in this matter at the Federal Court of Appeal.

United Food and Com- Is a receiver a successor employer and required to The judicial review hearing took place on Novem- mercial Workers Inter- respond to a notice to bargain? ber 18, 2019. The decision was reserved and has yet national Union, Local to be released. 175 v. Rose of Sharon (Ontario) Community (Ontario)

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CASE SUMMARY OF SIGNIFICANT ISSUES STATUS OF APPEAL

PricewaterhouseCoopers Can a trustee in bankruptcy, in reliance on the The Court of Queen’s Bench of Alberta, on August Inc., as trustee in transfer at undervalue provisions of the BIA 15, 2019, found that PwC, as trustee, could pursue bankruptcy of Sequoia unwind an oil and gas transfer between related its claim as against Perpetual Energy Inc., but dis- Resources Corp. v. companies? missed PwC’s claim against the CEO of Perpetual Perpetual Energy Inc., Can a bankruptcy trustee void a transaction on Energy Inc. et al. (Alberta) grounds of public policy and statutory illegality? In a decision released on September 24, 2020, the Court of Queen’s Bench of Alberta granted costs in favour of the CEO at 85%. The trustee in bankruptcy was directly liable for such cost award. Notice of appeal of the decision to allow PwC to pursue its claim against Perpetual Energy Inc. was filed by Perpetual Energy Inc. as of right to the Court of Appeal of Alberta on August 23, 2019. The hearing was held on December 10, 2020. There have been multiple ancillary decisions released in these proceedings, but as of December 22, 2020, a decision on the substantive issues has yet to be released.

Capital Steel Inc v Is a provision in a construction contract which On January 29, 2019, the Court of Appeal of Chandos Construction imposes monetary consequences on a subcontrac- Alberta reversed a chambers decision, finding the Ltd (Alberta) tor’s insolvency enforceable in bankruptcy? provision unenforceable in bankruptcy, as it acts to deprive creditors of value otherwise available to them and effectively directs value to an unsecured creditor. On October 2, 2020, in an eight-to-one decision, the Supreme Court of Canada dismissed the appeal, confirming the decision of the Court of Appeal of Alberta. The Insolvency Institute of Canada and the Cana- dian Association of Insolvency and Restructuring Professionals were interveners in this matter.

7636156 Canada Inc. v How much may a landlord draw down on a letter The Ontario Superior Court of Justice held that a land- OMERS Realty of credit provided by the bankrupt as security for lord may only draw down on a letter of credit in an Corporation (Ontario) the bankrupt’s obligations under a lease? amount equal to three months’ accelerated rent following disclaimer of the lease by a trustee in bankruptcy. Notice of appeal was filed with the Court of Appeal for Ontario on November 1, 2019.

1732427 Ontario Inc. v Is a pre-authorized debit payment paid to a supplier The Court of Appeal for Ontario allowed the ap- 1787930 Ontario Inc. after a debtor has filed a notice of intention to file peal on December 3, 2019, finding that the motion (Ontario) a proposal under the BIA an exercise of a credi- judge erred in not considering whether the pay- tor’s remedy and thus prohibited by the statutorily ment was related to a bona fide agreement with a mandated stay of proceedings? key supplier to pay past debts, which are permitted payments under the BIA. The Court of Appeal for Ontario sent the case back down to the motion judge to make a finding of fact on this issue. As of December 22, 2020, no decision has been released on the substantive issues, as returned to the motion

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CASE SUMMARY OF SIGNIFICANT ISSUES STATUS OF APPEAL

Re Media5 Corporation What is the scope of section 243(1) of the Bank- The Court of Appeal of Quebec allowed the ap- and Acquisitions Essagal ruptcy and Insolvency Act (the provision allowing peal in part on July 20, 2020, confirming that the Inc. and Pricewater- for the appointment of a national receiver) in rela- appointment of a national receiver under section housecoopers Inc., the tion to the provisions of the Civil Code of Quebec? 243(1) of the Bankruptcy and Insolvency Act was proposed receiver Can a secured creditor resort to the appointment possible in Quebec, but that the provincial notice (Quebec) of an interim receiver in order to sell the insolvent requirements and time limits must be respected. business as a going concern? The court stated in dicta that the implication of this decision is that when a secured creditor is seeking the appointment of a national receiver where assets are located across the country, each applicable notice period and time limit must also be respected. In respect of the second issue, the court held that an interim receiver could not be appointed for the purpose of selling an insolvent business as a going concern. Leave to appeal to the Supreme Court of Canada was filed on November 12, 2020. The Insolvency Institute of Canada was an intervener in this matter at the Court of Appeal of Quebec.

Forjay Management Ltd. Are advances made by priority mortgage holders The Court of Appeal for British Columbia allowed v 625536 B.C. Ltd. in excess of the face amount of such mortgages the appeal in part on February 27, 2020, finding (British Columbia) secured? that: If secured, do such advances enjoy the same prior- • advances in excess of the principal of a mort- ity as the face amounts where a second-ranking gage are secured where the underlying mortgage mortgage has been registered prior to the advances document contemplates the securitization of being made? such advances; How much latitude does a judge have to alter the • where a subordinated mortgagee has not commercial terms of a loan agreement which has provided written notice of the registration of been found to charge a criminal rate of interest? its mortgage to the prior mortgagee, additional amounts advanced by the prior mortgagee in excess of the face value of the mortgage enjoy the same priority as the face amount (the written notice requirement is specific to a British Columbia statute); and • where a criminal rate of interest has been found a judge may void the contract, strike out a term or terms, or read down the interest rate to 60%, but not some combination thereof. Leave to appeal to the Supreme Court of Canada was dismissed on October 1, 2020.

Urbancorp Cumberland Is subsection 9(1) of the Construction Lien Act, The Court of Appeal for Ontario allowed the 2 GP Inc. (Re) which provides for a trust over sale proceeds of appeal on March 11, 2020, finding that a trust (Ontario) property in favour of unpaid contractors, effective created by subsection 9(1) of the CLA is effective in a CCAA proceeding? in a CCAA sales process, unless it is displaced due to conflict with a specific priority created under the CCAA. As no specific CCAA priority displaced the contractor’s trust claim, it was found to be effective in establishing a trust over the sale proceeds received by the monitor on behalf of the owners of the real property sold. As of December 22, 2020, no application for leave to appeal to the Supreme Court of Canada has been filed.

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CASE SUMMARY OF SIGNIFICANT STATUS OF APPEAL ISSUES

9323-7055 Quebec Inc. Can a plan of arrangement authorize a monitor The Court of Appeal of Quebec dismissed the appeal on (Aquadis International to exercise the rights of creditors to initiate le- May 21, 2020, confirming that a plan of arrangement Inc.) gal proceedings against third parties on behalf can authorize a monitor to exercise the rights of credi- (Quebec) of creditors of the debtor? tors to initiate legal proceedings against third parties on behalf of creditors of the debtor. Important to the decision was that the creditors voted unanimously in favour of allowing the monitor to exercise their rights on their behalf and that the creditors’ rights against the third parties in the supply chain could not be exercised otherwise as they were stayed by the stay of proceedings. As of December 22, 2020, no application for leave to appeal to the Supreme Court of Canada has been filed.

Curriculum Services Can a landlord claim as an unsecured credi- The Court of Appeal for Ontario allowed the appeal in Canada (Re) tor for the disclaimer of its lease, calculated in part on April 27, 2020, confirming that a landlord is (Ontario) accordance with its contractual rights under only authorized to claim the unrecovered balance of its the lease? preferred claim for three months’ accelerated rent as an unsecured creditor in the bankruptcy of its tenant and is not entitled to claim as an unsecured creditor for other contractual damages relating to the unexpired term of the lease. As of December 22, 2020, no application for leave to appeal to the Supreme Court of Canada has been filed.

Toronto-Dominion Bank Does a motion for forced surrender and The Supreme Court of Canada dismissed the appeal on v Young taking in payment – a purely hypothecary November 7, 2019 with reasons to follow. (Quebec) remedy - brought against a debtor who is not The Supreme Court of Canada’s reasons were released on the original debtor constitute a separate and June 19, 2020 and in one line confirmed the decision of the independent remedy, or does it depend on the Court of Appeal of Quebec, that a motion for a hypothecary continued existence of the proceeding against remedy brought against a debtor who is not the original the original debtor? debtor depends on the continued existence of the proceeding against the original debtor. Upon the extinguishment of the claim against the original debtor, by expiration of limitation period or otherwise, the hypothecary remedy sought against the subsequent party is similarly extinguished.

Hutchingame Growth Does the automatic termination of a contract, The Court of Appeal for Ontario dismissed the appeal Capital Corporation v triggered by bankruptcy, violate stays of pro- on July 2, 2020, confirming: Independent Electricity ceedings in insolvency? • that the automatic termination of a contract, trig- System Operator Does such an automatic termination provi- gered by the bankruptcy of a counter-party to such (Ontario) sion violate the common law “anti-deprivation contract does not, by itself, violate the stay of pro- rule”? ceedings in such counter-party’s insolvency proceedings; and • that the automatic termination provision did not violate the “anti-deprivation rule” as the termination of such contract removed no value from the reach of the debtor’s creditors, in part because it was an executory contract, the termination of which eliminated the debtor’s opportunity to perform, but did not necessarily deprive the debtor’s creditors of value. An application for leave to appeal to the Supreme Court of Canada was filed on September 30, 2020 and responding materials were filed on November 13, 2020.

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CASE SUMMARY OF SIGNIFICANT ISSUES STATUS OF APPEAL

Yukon (Government of) v Is a notice of intention to make a proposal in bank- In three separate decisions, the Supreme Court of Yukon Zinc Corporation ruptcy filed extra-jurisdictionally the day before the Yukon held the following: (Yukon) hearing to appoint a receiver effective in staying the • In a decision released on August 7, 2019, that in-province receivership proceedings? the stay of proceedings in the extra-provincial Does a Court-Appointed Receiver have the author- proceedings was to be lifted and the bankrupt- ity to partially disclaim a lease for equipment; cy proceedings initiated by the debtor moved continuing to lease certain equipment it deems to in-province. The receiver was subsequently be essential and disclaiming the lease with respect appointed. to the rest? • In a decision released on May 26, 2020, that To what extent is an obligation to post security for a Court-Appointed Receiver does, in the potential future remediation costs a provable claim context of an urgent continuation of care and in bankruptcy and secured against the property of maintenance and environmental remediation, have the authority to partially disclaim an the debtor? equipment lease. • In a decision released on May 26, 2020, that the obligation to post security for potential future remediation costs is not a provable claim in bankruptcy and that the government claim associated with remediating environmental damage is provable in bankruptcy only after the government entity has actually incurred costs of remediation. Such claim is secured, on a first priority basis, against the real property affected by the environmental damage and any contiguous property related thereto, including the mineral claims associated therewith. Notice of appeal to the Court of Appeal of Yukon was filed in respect of all of the above-noted cases on June 5, 2020. The hearing occurred on November 17 and 18, 2020. A decision has yet to be released.

Teliphone Corp. v Ernst What is the standard of review in appeals of moni- The Court of Appeal for British Columbia dis- & Young tors’ decisions with respect to determining proofs missed the appeal on December 27, 2019 confirm- (British Columbia) of claim? ing that the standard of appeal of monitors’ decisions with respect to determining proofs of claim is correctness for issues of extricable questions of law and the lesser, deferential standard of “palpable and overriding error” for matters of fact or mixed fact and law. Leave to appeal to the Supreme Court of Canada was dismissed on November 5, 2020.

All Canadian Investment Can a plan of arrangement under the CCAA The Supreme Court of British Columbia held, on Corporation (Re) include a provision that all creditors shall be paid November 3, 2020, that CCAA plans of arrange- (British Columbia) post-filing interest at the 5% interest rate provided ment can include post-filing interest in exceptional for under the BIA? circumstances, which can include where the creditors will be paid in full under the plan and would receive such post-filing interest in a bankruptcy of the debtor. As of December 22, 2020, leave to appeal to the British Columbia Court of Appeal has not been filed.

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CASE SUMMARY OF SIGNIFICANT ISSUES STATUS OF APPEAL

12178711 Canada Inc v How is the solvency test under section 192(3) of The Court of Appeal of Alberta dismissed the ap- Wilks Brothers, LLC the CBCA to be applied? peal on December 1, 2020, confirming inter alia (Alberta) Were the actions of the dissident noteholders that: unfairly characterized in the court’s determination • A company may satisfy the insolvency test that the plan was fair and reasonable? under section 192(3) of the CBCA so long as the company will be solvent at the point in time of implementation of the arrangement and for a reasonable time thereafter; and • Although not determinative of the issue on appeal, a court may find that a creditor is acting for an improper purpose, in which case its votes may be disregarded or discounted in the analysis of the fairness of the transaction. We understand leave to appeal to the Supreme Court of Canada will be filed in this matter, but as of December 22, 2020, a leave application has yet to be reported.

Petrowest Corporation Is a court-appointed receiver bound to arbitrate The British Columbia Court of Appeal dismissed v Peace River Hydro disputes under contracts that include mandatory the appeal on November 30, 2020, confirming Partners arbitration clauses? that, due to the doctrine of separability, which (British Columbia) recognizes that arbitration clauses are independent agreements within an impugned agreement, the receiver effectively disclaimed the arbitration clause/agreement by bringing the contractual claim in court. As a result, the arbitration clauses are of no force or effect. As of December 22, 2020, leave to appeal to the Supreme Court of Canada has not been filed.

Arrangement relatif à Does a court have the jurisdiction to issue a reverse On November 11, 2020, the Court of Appeal of Nemaska Lithium inc. vesting order (a vesting order pursuant to which the Quebec dismissed the application for leave to ap- (Quebec) shares of an insolvent entity are sold to a purchaser peal, confirming that a court has the jurisdiction to free and clear of creditor claims and unwanted as- issue a contested reverse vesting order. sets) in contested proceedings? An application for leave to appeal the decision of the Court of Appeal of Quebec was filed with the Supreme Court of Canada on December 11, 2020.

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